A balloon loan is a mortgage where, at some point in the life of that loan (at perhaps three, five, seven or 10 years), the entire outstanding balance must be paid in full. To be clearer on this, the loan would more than likely paid back by refinancing it into a new loan.
So how does it work to begin with? A balloon loan is similar to a 30-year fixed-rate mortgage in how you qualify for it, meaning the same income, credit and asset requirements.
The reason that someone might want to take a balloon loan, as opposed to a 30-year fixed-rate loan, is that the interest rate (and hence, the payments) are normally lower on the balloon loan. People who take balloon loans often enter the transactions with the expectation that they will be selling the properties before the balloon payments become due.
The drawback to a balloon loan, if there is one, is that if and when you reach the point where the balloon payment is due, to get into your new loan, you could be paying a significantly higher interest rate than the one with which you started.
For this reason, if you are looking to take out a balloon loan, you want to make reasonably sure that you are going to be out of the property when the loan comes due, or perhaps stay with the 30-year or even a 15-year fixed-rate option.
Would you like to learn more about balloon loans? Call or email me and we can go over the details and what is the right fit for you.